Saturday, July 24, 2010

This Isn't What Social Democracy Looks Like

Before I start generating new content, I am going to cheat one more time and post an email I wrote in January in response to this article by Jim Manzi proposing an alternative to what he perceived as a drive towards social democracy in the United States:

I have a couple key points of difference with Manzi. First, I think his conception of government intervention in markets is misguided and outdated. Second, I think his proposed solutions do little to address the social cohesion problems that he pretty aptly identified.

On the first point, Manzi's conception of government interference seems rooted in opposition to command and control regulation. To this extent his discussion of Reagan-era regulatory reform makes some sense. It was during this period that the government generally began to abandon command and control-styled regulation in favor of the market-oriented regulatory frameworks that prevail today. In some respects this means less regulation (which fits Manzi's conception), but often it just means different regulation. Consider telecommunications. For many decades the telecommunications market operated with relatively little regulation, governed essentially by a handshake agreement (and settlement of several antitrust cases) between the federal government and AT&T, whereby the government allowed AT&T to exploit a natural monopoly and ruthlessly crush its competition, and in exchange AT&T would provide near-universal service at geographically-equalized rates (subsidizing areas with high costs of service with profits from areas with low costs of service). This arrangement produced little regulation and an unproductive and stagnant, if stable, market. In natural monopoly markets like telecom, market-based regulation facilitates competition and drives innovation and productivity. Regulation of financial markets (including the sort recommended by Manzi) is typically intended to prevent fraud and improve the information available to investors, facilitating increased market competition. Carbon tax or cap and trade policies are designed to internalize external costs so that competition produces market-optimal production levels (including driving competition and innovation in clean tech). And so on.

Health care reform is a bit of an odd duck in that it merely codifies an existing broad social judgment that we as a society are morally and ethically unwilling to live with the consequences of a pure market for health care. You could say that this is a case of Manzi's tradeoff between market efficiency and social cohesion. But it's not as if health care reform is shifting society on that scale. That judgment was made a long time ago--we already treat anyone who walks into an emergency room in need of care. But we provide non-market-based care in a pointlessly inefficient manner. Moreover, various features of the current system inhibit worker mobility (most especially the combination of employer-based health insurance and pre-existing conditions), reducing the efficiency of the labor market. Ideally, smart regulation should be able to remedy these inefficiencies while carving out space for competition in the areas where it makes sense and does not directly contradict our general sense of social justice.

And Manzi's criticism of the Recovery Act and TARP fail to address the ultimate aims of those regulations--preventing complete economic meltdown. There is a broad (though certainly not universal) consensus among economists that these policies have worked, and that true disaster was averted. Sure, as Manzi points out, the Recovery Act (though not so much TARP) puts a big dent in the federal coffers, but the Great Depression cut federal tax revenues by 2/3s against the pre-depression levels--how would that have impacted the federal debt level (to say nothing of its human costs)? And while Manzi criticizes the takeovers of AIG and Citigroup and the government's intervention in the cases of Bear Stearns, Merrill Lynch, Fannie Mae, and Freddie Mac, there is again a considerable amount of consensus that the one event that pushed the financial system to the brink of utter collapse was the government's decision, in an effort to impose market discipline, to allow Lehman Bros. to go under. It's not as if the government had a lot of options in these cases. This is hardly, as Manzi would have it, the realization of some scheme to nationalize key market segments. The intervention in the auto industry is less defensible, but nonetheless represents essentially a judgment that the existing bankruptcy system does not provide an efficient mechanism to unwind a massive business concern without inflicting unnecessary collateral damage. I don't know if this is correct, but I am quite confident that the Obama administration has no real interest in running the auto industry. And I feel obligated to point out that Manzi's assertions about the Recovery Act are just plain wrong. He states that the Recovery Act is "dominated by outright social spending." In fact, the sort of social spending Manzi mentions (e.g., food stamps) is a) only about 10% of the cost of the Recovery Act, and b) one of the most effective means to actually stimulate the economy. By contrast, tax cuts represented about 35% of the Recovery Act (and sadly do a poor job of stimulating the economy).

In the end, there is no evidence of an actual shift towards a social democracy ... which is probably unfortunate, because, as Jonathan Chait points out in a response to Manzi, European-style social democracy seems to work really well. Manzi's whole foundational assumption that the U.S. economic system is superior to the European version has little evidentiary support. European social democracies are quite competitive.

Which gets to my second point: Manzi doesn't appear to have a solution to the problems he posits.

Manzi provides several suggestions to address the perceived threat of social democracy, but only two that could possibly address the issues Manzi identifies regarding social cohesion: increased school competition and immigration reform. His suggestions on both fronts seem sensible, but also modest, and not nearly up to the scale of the problems he identifies. Manzi's school proposals would, I think, be an incremental improvement, but I don't think they would nearly equalize the quality of education obtained by the high income and low income groups Manzi identifies. And I think just about everyone agrees that immigration reform would be a good idea, but I suspect that Manzi perceives immigration to be much bigger problem than I do. Together, these reforms would probably put a dent in the emerging levels of social inequality, but a small one. I appreciate that Manzi is thinking in productive directions about policy reforms aimed at social cohesion, something few of his contemporary conservative comrades are willing to do. However, if he rejects the sort of broad-reaching social safety net that European social democracies employ, particularly while resting on unfounded assumptions about the economic costs of this approach, I think it's incumbent on him to propose an alternative that can have a similarly broad-reaching impact on social cohesion. He doesn't come close.